Investment should be well diversified

Ranjeet S Mudholkar is vice chairman and chief executive officer at Financial Planning Standards Board India (FPSB India), a professional standards setting body that guides the development and promotion of standards for financial planning professionals. In an interview with Falaknaaz Syed, Mudholkar speaks about the current financial planning landscape, and Securities and Exchange Board of India's (Sebi) proposed regulations for investment advisers. Excerpts:

Sebi abolished entry load for mutual funds in August 2009 following which the growth of mutual fund industry fell. In 2011, Sebi introduced transaction fees on mutual funds. Does consumer protection hurt business?

The decisions on regulations are always taken best when they are considered in the consumers’ interest. One has to see what is good for the investor, based on which, the regulatory infrastructure and business models are built around consumer benefits. For example, a few years ago, telecom service providers used to charge consumers for incoming calls, which were later abolished. So, regulations and business models are structured for benefiting consumers.

Notwithstanding the same, we view the introduction of transaction fee in mutual funds as a clarification that brings clarity on the distribution charges charged to consumers.

How do you justify over $60 billion engineering exports when the manufacturing sector is slowing down?But then companies cry wolf that regulations are hurting their margins and growth. The same happened in the insurance industry when the unit-linked insurance plans (ULIP) regulations were introduced in September 2010.

The insurance industry follows a close structure with a tied agency concept. The agents are the marketing arms of insurance companies and have to act in the interest of the insurers. If you have a budget of Rs 20 lakh and ask a Maruti dealer which car you can buy, he is not expected to recommend a Honda City. A multiple car dealer will help you in choosing the right car. Similarly, insurance brokers can sell multiple insurance companies' products, but agents can sell only one insurance company’s product. There should be convergence of regulations and difference between an adviser and a seller should be established as well. For example, a doctor earns his income from the patient, while the chemist earns commissions from the pharmaceutical companies. The Sebi’s draft regulations for investment advisers are an excellent approach for the same. They differentiate the intermediation industry on "sales" and "advice". Thus, a new category of investment advisers would recommend consumers financial products in the best interest of consumer on a fee-based model.

But Sebi’s proposed regulations on investment advisers have not touched other asset classes except securities.

Sebi under its jurisdiction can look at security products only. But it is the only regulator that can form a self-regulatory organisation (SRO) under the SRO regulations whenever notified. We have suggested that the said SRO may be coopted by other regulators as well, which would lead to convergence of regulations or akin to the same. The draft regulations were framed by taking feedback from inv­estor groups, Reserve Bank of India and Pension Fund Regulatory Deve­lopment Authority (PFRDA). Furt­her, as stated in the approach paper recently by the Financial Sector Legi­slative Reforms Comm­ission (FSLRC), unification of various financial sector regulators may be warranted in the interest of consumers. For any business model to evolve, there has to be learning and development. For example, in Australia, people graduated from being agents to becoming advisers, which equipped them with skills and allowed them to charge higher share of wallet from their existing clients.

What are your recommendations for the budget?

At present, the government has recognised the need for transforming a ‘nation of savers’ to a ‘nation of investors’. At a macro level, as a nation we have a high savings rate of more than 30 per cent, as a nation we account for nearly one-third of the total world demand for gold, but when it comes to capital markets the retail participation is still under 5 per cent. An efficient financial sector requires India's huge household savings to be suitably invested to fulfill the availability of capital at reasonable cost over long term to build the necessary infrastructure for overall development - industry as well as agriculture. The financial consumer is the last unit, which actually generates this capital. If there are right measures to protect consumer and an environment which promotes and aids ethical advisory to handhold this consumer through his/her life goals, we are sure the economy would get huge impetus from a rejuvenated financial sector. There is need for financial advisers bill in India, which is there in several countries in various forms.

Indians invest a lot in gold and bank deposits. High gold buying is resulting in high current account deficit. What is your view on gold as an investment class?

Investment should always be in proper asset allocation depending on age, financial goals and overall risk profile of an individual. Investment in gold and bank deposits should be there, but their allocation percentage to the entire amount saved as well as net worth should be in safe proportions. There are chances of sub-optimal returns from these assets when we take inflation into account. The investment should always be well diversified amongst asset classes such as equity, debt, real estate, gold and cash holdings. There is no thumb rule for a fixed percentage to be invested in any asset class. One should contact a certified financial planner. However, in-principle, out of our total net income, 1/3rd should go for savings, our expenditure should not exceed 1/3rd of your net salary, another 1/3rd of our net income should be used to pay our debt.